Business Overview
Paddy Power Betfair PLC (PPB) is a leading multinational, multi-channel sports betting and gaming company; headquartered in Dublin, United Kingdom. Powered by sophisticated in-house technology, sporting partnerships, creative marketing and innovative products, the group operates some of the most visited online sports betting and gaming brands. Though the history of the group goes back more than 30 years ago, when Paddy Power established betting shop chains in Ireland, the group in its current form was established in 2016 when Paddy Power and Betfair merged to create Paddy Power Betfair. Today, it is a leader in its industry with nearly 8,000 people employed by the group. The company boasts having over five million customers worldwide, who bet through five leading brands operated by the group: Paddy Power, Betfair, Sportsbet, FanDuel and TVG. It is a constituent of the FTSE 100 index.

Key Statistics


Management
Gary McGann is the Chairman of the Board; he was appointed to the position on 1 July 2015. Peter Jackson is the Chief Executive Officer. Jonathan Hill holds the position of Chief Financial Officer.

Segments
The company currently operates across four division: Online, Australia, Retail, and the US. The Online segment operates the company’s international Betfair operations across several European and International territories and comprises its Paddy Power and Betfair online operations in the UK and Ireland, including a range of B2B partnerships and 'Dial-a-Bet' telephone betting service. The Australian division operates in the fast-growing Australian market through a leading online betting brand – Sportsbet. The Retail division offers a market-leading customer proposition with over 620 betting shops across the UK and Ireland. The US division operates across 45 states with over 8 million registered customers through FanDuel Group, which is the number one online operator in the evolving US market, and other smaller operations.

Top Shareholders

 (Source: Thomson Reuters)

Trading Update (Q1 FY2019)
Driven by strong growth in both Australia and the US, Q1 revenue grew by 17% year-on-year to £478m. For Betfair, the company continued to make good progress on the technology development work, while underlying momentum remained healthy for Paddy Power with 22% growth in the average daily actives.

Key Financial Highlights (FY 2018, in £m)

(Source: Company Filings)

Driven by increased investment in the new growth opportunities and enhanced competitive positioning in core markets, the group’s revenue accelerated by 7% in 2018 to £1.9 billion. On a proforma basis, revenue increased by 6%, with gaming up by 11% and sports up by 5%. Gross profit grew by 5% to £1,403m, while it grew by 3% on a pro forma basis. Due to investments in the budding US sports betting market of £24m, the underlying EBITDA in 2018 declined by 5% during the year to £451m. If the impact of investment losses and increased betting taxes are excluded, underlying EBITDA on pro forma basis was up by 9% (constant currency basis), which was towards the top end of the guided range at Q3 trading update. Underlying operating profit stood at £360m, representing a decline of 8%. While the company reported a profit before tax of £219m (2017: £247m), the net profit attributable to shareholders declined by 7% to £201m. The underlying EPS was down by 5% to 379.3p, reflecting the result of the share buy-back programme. During the year, £584m was returned to owners through share buybacks and dividends. At the year-end, the company had net debt of £162m, representing 0.4 times EBITDA, compared to a target of 1-2x. A final dividend of 133p per share was proposed by the Board, helping to maintain the dividend at 200p per share, which represents a payout ratio of 53% on underlying earnings per share.

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
Though the gross profit rose by 5%, gross margin declined by 190 basis points as compared to the last year. This was because of a 16% rise in the cost of sales, which increased due to the annualisation of changes to betting taxes and levies implemented during 2017. Operating expenses also increased by 10%, driven by a 17% rise in sales and marketing expenditure, which resulted in a decline in operating margin. All the profitability margins were reported to a decline during 2018, though mostly they were still more than the industry’s median. The current ratio experienced a significant decline and was now less than the industry’s median. Though the group’s leverage increased, it was still in a comfortable position and was considerably less than the industry’s median. While the company’s asset turnover ratio slightly increased during the year, it was below its peers, indicating more efficiency gains could be realised.

Valuation Methodology
Method 1:Price/Cash Flow Approach (NTM)
 

To compare PPB with its peers, P/CF multiple has been used. The peers are Merlin Entertainments PLC(NTM P/CF was 7.99), GVC Holdings PLC(NTM P/CF was 8.17),NetEnt AB (NTM P/CF was 8.97), Sportech PLC(NTM P/CF was 18.20) and bet-at-home.com AG(NTM P/CF was 18.30). The mean of P/CF (NTM) of the company’s peers was 12.33x (approx.).

Method 2: EV/Sales Multiple Approach (NTM)


To compare PPB with its peers, EV/Sales multiple has been used. The peers are GVC Holdings PLC(NTM EV/Sales was 1.56), Cineworld Group PLC(NTM EV/Sales was 1.83),Merlin Entertainments PLC(NTM EV/Sales was 2.80),bet-at-home.com AG(NTM EV/Sales was 3.05) and NetEnt AB(NTM EV/Sales was 3.18). The mean of EV/Sales (NTM) of the company’s peers was 2.49x (approx.).

*All forecasted figures and Peer information have been taken from Thomson Reuters.

Share Price Commentary

Daily Chart as at May-20-19, before the market closed (Source: Thomson Reuters)

On May 20, 2019, at the time of writing (before the market closed, at 1:30 pm GMT), PPB shares were trading at GBX 5,796, down by 1.52 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 9,184.90/GBX 5,390.00. At the time of writing, the share was trading 36.89 per cent lower than the 52w High and 7.53 per cent higher than the 52w low. Stock's average traded volume for 5 days was 118,017.60; 30 days - 187,859.10 and 90 days – 229,133.74. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 16.9x as compared to the industry median of 12.9x. The company's stock beta was -0.17, reflecting a negative correlation of the stock as compared to the benchmark index. The outstanding market capitalisation was around £4.60 billion with a dividend yield of 3.36 per cent.

Risks Assessment and Growth Prospects
The group faces a risk of fines and investigations which can impact the future growth as it operates in an industry which is subject to the adverse regulatory headwinds, breaches of which can be potentially fatal for the group. Risk also arises from the data management and cybersecurity threat, which became even more material since the introduction of the EU-wide General Data Protection Regulations, as it can result in formal investigations or possible litigation. However, through a combination of investment in new growth opportunities and continued profitable growth in existing markets, the group is well positioned to deliver robust and sustainable returns. The company’s scale and in-house capabilities will enable it to capitalise on the broad array of market opportunities available globally as ongoing industry evolution is increasingly advantageous to large-scale online operators. With a CAGR of 11% in 5 years to 2018, the global online betting and gaming market is growing at a high pace and still has a long way ahead even in a more mature online market such as the UK as spending continues to migrate online. This trend is expected to continue in 2019 and beyond due to recent regulatory changes in retail.

Conclusion
The company would be able to invest in substantial growth opportunities as it is backed by a steady ongoing cash generation within its core markets and strong balance sheet. Based on strong prospects and supported by valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 5,886 (as on 17^th May 2019) with high single-digit upside potential based on 12.33x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 2.49x NTM EV/Sales Value (approx.) on FY19E sales (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on May-20-19).

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